This paper applies the panel fixed effects with vector decomposition estimator
to three FDI datasets to estimate the impact of time-invariant variables on FDI while including fixed effects. We find that the omission of fixed effects significantly biases several of these variables, especially those proxying for trade costs and culture. After including fixed effects, we find that many time-invariant variables indicate the importance of vertical FDI. We also find that by eliminating these biases, the differences across datasets largely disappear. Thus, controversies in the literature that are driven by differences in data sets may be resolved by using this estimation technique.
JEL Classification: F14, F23
Key Words: Foreign Direct Investment, Trade Costs, Culture

Asymmetric information and fear of acquiring a 'lemon' may explain the
paucity of foreign investment in emerging market economies. If investors
are uncertain about the profitability of investments, intrinsically inefficient,
temporary partnerships or joint ventures may serve as mechanisms through
which information is transmitted. Temporary partnerships with joint in-
vestments by the domestic firm and the foreign investor, together with a
buy-out option to the investor, can be used to separate good and bad invest-
ment prospects in equilibrium. However, non-revealing equilibria may exist.
Implications for foreign direct investment are traced and briefly related to
the experience of transition economies.
Keywords: investment, complementary assets, partnerships, joint ventures
and licensing, costly signaling
JEL: D8, F2, L14, O12